Agriculture is one sector of the economy that has sucked up a large portion of the country’s budgetary provision throughout the last few years of this administration. Despite this, since 2015, food prices have risen by over 100 percent and it keeps going higher without knowing no bound.
The average Nigerian family spends 57 percent of their income on food, according to the National Bureau of Statistics (NBS) in a report titled “Consumer Expenditure Pattern report for 2019.”
According to the National Bureau of Statistics, the cost of food in Nigeria grew by 22.28 percent in May 2021 compared to the same month the previous year. Food costs in Nigeria have been rising as a result of a number of factors, the most significant of which being the activities of bandits and rebels in portions of the north, which have resulted in a reduction in food supplies; the border restriction has also exacerbated the situation.
In short, the cost of the most important item on the average Nigerian’s budget has increased, resulting in higher expenses than ever before, leaving the average Nigerian unsure of what tomorrow holds, if they will see it at all, as food has become a luxury only the wealthy can afford.
Inflation occurs when effective demand for goods and services remains high while prices for those goods and services rise without a matching increase in the products produced and supplied.
Since 2016, Nigeria’s inflation rate has been in the double digits, implying that the Naira, the country’s legal tender, has lost purchasing power.
When a jurisdiction’s currency has an excess of supply, the surplus cash circulates through the economy, raising prices. When there is a scarcity of money, it becomes valued. The scarcity and availability of both currencies are thus the difference between $1 (USD) and N1. I will show you how.
Despite the fact that the dollar is printed in greater volume and quantity than the naira, the dollar is recognised legally in Iran, North Korea, and Afghanistan. Ecuador’s legal tender is the US dollar; as a result, the US can manufacture $5 trillion in 10-year bonds with extremely low coupon rates, and other countries will buy those bonds or keep USD because they import commodities from the US. As a result, its function makes it valuable, and its appeal makes it scarce.
Crude oil, for example, is priced in US dollars; therefore you will need US dollars to purchase oil from Saudi Arabia. This maintains the scarcity of US dollars by keeping demand for them high.
In contrast, the naira is solely legal tender in Nigeria. Nigerian crude is traded in US dollars rather than Nigerian naira. The amount of cash in Nigeria increases when the CBN prints Naira. If production of products and services does not keep pace, surplus currency accumulates in the system, and with fewer goods to buy, prices rise, resulting in inflation.
Inflation has a major impact.
In real terms, if I invest N500,000 in a bond and earn even 15% per year in Naira terms, I will have a negative return because inflation is higher than 15%.
Inflation diminishes a currency’s purchasing power; therefore I need to expand my capital by taking a risk and earning a risk-adjusted return just to keep my income at the same purchasing power. As a result, if I earn N500,000 and inflation is 15%, I will need to earn N610,000 or N110,000 more to have the same purchasing power as N500,000.
This is why we need to invest and take chances. We lose the ability to acquire the same products on a regular basis if the principal sum does not rise because of price increases induced by inflation.
What can investors do to keep their Naira earnings from depreciating?
It is nearly hard to avoid inflation. Inflation occurs in practically all currencies, however the rate of inflation differs. The key is to keep and invest money in a currency that does not depreciate as quickly as the Naira. You might make a plan to just keep your money in funds that do not pay high returns but do hold their value. As the investment period lengthens, it is recommended that you seek not only current income but also some yield to account for predicted inflation, even if the investment is in US dollars.
Recommendation
To hold surplus naira cash to hedge and earn in USD against inflation, consider the following recommendations on USD Fixed Income and Dividend ETFs (Exchange Traded Funds). The risk and duration of the holdings must also be understood by the investor. I recommend dividing your money into two categories: before one year and after one year.
These ETFs can be purchased through Chaka, which has been approved by the Securities and Exchange Commission of Nigeria as a digital sub-broker. I appreciate FINTECH Apps like Chaka because they allow you to invest and trade in smaller lot sizes than traditional brokers.
Keep in mind that inflation results in a decrease in purchasing power. Risks must be taken in order to rebuild buying power. I have solely invested in fixed income and dividend-paying ETFs, but equities that pay dividends, such as REITs (Real Estate Investment Trusts), are another solid alternative if your investment horizon is longer and you are willing to take on more risk. Remember that stocks are more volatile than bonds and that you could lose everything, including your investment, if you invest in them.
NOTE: An Exchange Traded Fund (ETF) is a form of security that tracks an index, sector, commodity, or other asset and may be bought and sold on a stock exchange just like any other stock. It can be set up to follow anything from the price of a single commodity to a huge and diverse group of securities. ETFs can even be designed to follow certain investment strategies.
